Why Extortionate Licensing Ransoms Are Bad For The Industry & Fans

It is no secret that if you are launching a new digital music service and you want the major label music catalogues on board, your business is going to require a very large bank account. Sadly most of your bank account will probably go to the major labels, leaving you little for independent music, infrastructure and marketing your service. However, is demanding such high ransoms upfront beneficial to the music business overall or does it in fact limit the choice of services available and hence innovation in the sale of music through digital channels?

Let me be clear that TMV believes rights owners should receive some form of upfront advances because yes they are providing access to their catalogues and incur costs associated with developing artists. Yet to demand the scale of advances that have been the norm for the last decade is in our view detrimental to both the recorded music and publishing sides of the music business. One just has to see the decline and death of numerous services including IMeem, Myspace music and Beyond Oblivion amongst many others to reinforce the stupidity of excessive advances over the long-term.

The key problem is that although labels trade on their artists catalogues and state they need to make sure they do pay their roster of artists – none of these massive advances are ever paid through to said artists. I have not met one senior label executive who can explain (on or off the record) what calculation they use to pay these artists from the advances they receive from digital music services who license music from them. TMV have no doubt it is because they have no calculation because they are not paying the relevant splits to artists.

It could be argued that services such as Spotify, Rhapsody, We7 and numerous others are owed a refund on their advances now that certain large artists have insisted on their tracks being taken down from such streaming services. If labels cannot deliver all artists within their catalogues that were sold to these digital music services then surely if they sold what we now know are deficient catalogue’s then such ransom advances should not be charged?

How can labels expect new services to become viable businesses without key acts in the catalogue’s that they can make available to music fans? Will Page at PRS has already debunked Chris Anderson’s ‘Longtail Theory’ as just that – theory that does not work in practice. As such digital music businesses rely on big selling acts to ensure their own business are profitable. A label by selling a lie to digital music services affects such company’s business viability.

TMV have no issue with large artists who have strong management that can insist on their tracks being taken down from any music services. But labels clearly should not be selling what they do not properly control. We do have a very big problem with labels selling a false prospectus. If this were done in terms of a company IPO it would be regarded as fraud and prosecuted as such.

On another note it is clear that such high ransom level advances have driven away investors from digital music retail services. Yes Spotify and a tiny minority have continued to receive funding where music licensing is involved. However the great majority of music-focused services in the last couple of years that have received significant VC funding are services that do NOT require licensing from labels and/or publishers, services like; Soundcloud and Songkick, Next Big Sound and many more.

Compounding the issue is the fact that labels complain about Apple and how they want to cut iTunes dominance in the market. Yet these same labels make decisions which prevent a level playing field in licensing terms between iTunes and everyone else. This ensures margins are so tight that some of these new music services cannot function.

It could be argued new services failing is a very real intention of certain labels to ensure the iTunes status quo, which ironically just makes the labels even weaker and more dependent on one company that is a monopoly.

Obviously, if a new digital music proposition has no money left to market its service it will fail. TMV have spoken to several investor sources whom believe “it is labels intentions to ensure services fail”. When a digital music service fails the label pocket the advance and it goes straight onto their pile of ‘non-attributable’ income – TMV asks what good is a digital music service that has paid out so much in advances that it has no funding left to finance marketing? Add to this the nightmare of territory-by-territory licensing and it resembles a quagmire you want to run a million miles away from.

Labels pocketing of advances without paying through to artists on their roster rightly or wrongly provides services that pirate content with more fuel for the fire when they bring up arguments of labels ripping off artists. So why should the pirates care? The music business needs to also put its own house in order before preaching about stealing. If they did so they would command so much more respect and the majority of the population would support them instead of the sad current state of affairs.

It is also critical that new digital music retail services approach independent labels and their representative bodies at the same time as initial negotiations are occurring with major labels. Why? Because independent music makes up just under 30% of music sales on a global basis. That makes the independent music market share larger than Sony Music and miles ahead of WMG. Coming to independent labels after being rolled by the major labels is not just disrespectful it is also plain stupid, as a number of studies have outlined the higher usage and purchasing rates of indie music fans in comparison to major label music fans.

More new viable music services means more competition, which is good for both rights holders and fans alike.

Posted by Jakomi Mathews
on Feb 20 2012. Filed under Digital, featured, Labels.
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RECORD LABELS ARE SAYING, “WE KNOW OUR DIGITAL RIGHTS”
THE LABELS SHOULD FIND A WAY TO MONETIZE THEIR SONGS THEMSELVES
I have a great idea so stay with me for a minute on this. I would like to gain access to every major artist’s catalog of songs by partnering with the major labels that helped to produce them, do nothing to otherwise enhance or add value to the songs, create a bridge for my company to somehow exploit the sale of these songs and make some decent money , all the while directly competing with the labels and draining profits from them. Oh, I know this may appear as though I’m biting the hand that feeds me, but since they haven’t taken the time to brainstorm over how they could themselves find avenues of monetizing their catalog and are too focused on the old way of conducting business why shouldn’t I “help them” sell a few more records. Novel idea, right?
INTRODUCTION TO A BAD BUSINESS MODEL
The only thing wrong with my novel idea is that it’s been tried by a host of digital music service providers who are taking huge risks to try and develop a business model that will work within the confines of the current music environment mutation. A mutation toward digital only releases and the death of the physical product. The business model has worked for some, Itunes, Spotify and Rhapsody and hasn’t worked for others, Imeem, Myspace and Spiral Frog. Some would claim that the major labels have intentionally charged exhorbanant licensing fees with the sole purpose of putting these companies out of business. Some would also say that Area 51 still houses an E.T. from 1955, but Obama would like to keep it a secret because he has access to the president’s true birth certificate.
LABELS ARE NOT TO BLAME FOR DSPS FAILURES
The fact of the matter is that the major labels should not be blamed for the failure of throngs of digital service providers or the loss of their potential venture capital dollars. If you want to blame someone or something you shouldn’t have to go any further than the poor planning done by their financial gurus who create business plans that tell tales of haughty profits and expanding market share, if you believe the marketing spin that they have the software from the second coming that will revolutionize the way that consumers stream and download music. Remember how Imeem received $3 million in Series A funding in 2004, another $750k in Seed funding in 2006, obtained $15 million as an equity investment from Warner Records in 2008 and another $6 million in 2009, but spent far too much of that funding on overpaid executives who were trying to grow a company that was too dependent on users who were utilizing the embedded playlist function on their My Space pages. Then when My Space did a 180 and replaced those playlists with advertising spots instead, coupled with the inability of Imeem to raise enough revenue from advertisers to support the free downloads and sharing of music by its users, played a major role in their demise. Spiral Frog’s business model, although similar, was much more flawed than Imeem’s. Having raised over $45 million in investments they were completely ad supported whereas Imeem would charge a subscription fee for premium services. Spiral Frog offered musical product that utilized the WMA file format but it still wouldn’t work with Microsoft’s Zune hardware, let alone the Mac OS X, iPad or iPod. Why would you use a service that gives you music you can’t take with you to listen to?

Success as a DSP’s is based on flexibility. We’ve all heard consumers yelling about how they’d pay for music legally if they were given a better option for obtaining that music, if they were able to take their music with them, if they could utilize their DRM purchased product on more than one or two hardware devices and if they were given choices that would fit their lifestyles and budgets. If that’s what consumers are requesting then these are the examples you should follow.
Spotify: works well with iTunes and Facebook; has a serious bank of over 15 million songs which can be streamed to your mobile device and has a free, as well as a paid premium plan that is reasonably priced. Where Spotify goes wrong is that they are too reliant upon Facebook and iTunes. While iTunes is well entrenched in popular culture and will probably be around for some time to come because of their propensity to create popular hardware devices, Facebook at some point in time will be become the My Space of the future as soon as some bright young pimply-faced drop out from Princeton comes along with the next great idea.
Rdio: Flexibility is what Rdio offers with its desktop app that works with iTunes and WMP files, as well as with Facebook and Twitter. For mobile devices there is an app for iOS, Android and Windows phones that allow users to create and enjoy their playlists on any number of devices, but before you go off and sign up for your Rdio (ar-dee-o) subscription you should know that they have the smallest database of songs on the market and you won’t be able to use your iTunes playlist. So while it’s not perfect they do have a viable business model that offers the flexibility and freedom that users have been demanding.
Rhapsody: this is one of those services that has performed well so far, but look for Rhapsody to have some real problems surviving in the future as Spotify and the others gain market share. Rhapsody just doesn’t offer the pliability that the others do. What Rhaposdy does offers is a user-friendly interface that possesses enhanced navigation; improved device integration; and a whole slew of discounted songs for subscribers. They also have over 2.5 million diverse songs in their catalog.
It is important for the DSP’s to recognize that their very existence is dependent upon creating a more sustainable business model that tells the true story about the third party digital distribution business that really provides very little by way of margins. When you take into consideration the licensing fee that comes out of profits as a fixed cost, the share of the revenues that are due to the record labels and the direct digital distribution and “manufacturing” costs that are included in releasing the tracks there isn’t much left to cover the company’s overhead.
While access to song catalogs by digital distribution remains an important medium to increasing revenues in the recorded music industry, remember that consumers want a service that meets them at their level and offers simplicity, flexibility and options upon options for them to listen to their songs.